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Strategy   URGENT - Need Help Fast!  
 
This question has been closed, and points have been awarded.
Distributor Also Manufacturers Competing Products
Posted By: David on 5/16/2005 3:24 PM (CST) 2750 Points
I work for a mid-sized ($1B) manufacturer in a small but growing hi-tech segment, selling both direct and through distributors. The largest distributor ($5B, more diversified) sells about 40% their own manufactured products / 60% resell. Some of that 40% directly compete with my own line. This distributor also offers value-added services, including "let me run your procurement/inventory/logistics operations so you can focus on your core", gaining a powerful inside position. I suspect that they're leveraging their position to swap out my products for theirs, nulling my marketing efforts.
How can I gain more market share from this situation?

Posted by: W.M.M.A. Member Response
5/16/2005 3:58 PM (CST)
Quite a difficult situation, David.
I believe your "suspect" may be true. I have also seen where, in similar situations, they (competitor), is also assisting with the RFP's. If they have such a strong relationship with the clients, I don't know that you can gain market share from THIS particular situation, unless you change your model.

What type of 'value-added' can you provide? They obviously have tremendous differentiation...what's yours? Is there a market where they do not have penetration, that you can move in, and begin to develop strong relationships?

Unfortunately, you are in a tough situation. It seems, the more I think on this, the more I am convinced that:
a) your model has to change to meet the demands of your customers
b) your CRM program has got to get busy and visit with these customers to strengthen your relationships. How much time do you spend "on the street" vs "behind the keyboard"? This is crucial, David. They got in there, because your relationships weren't that strong...this is a guess, David...do not mean anything negative.

But, you are going to need to look at every aspect as to why this happened, and how you are going to prevent it from happening, again.

David, I know someone in Houston that is brilliant at this type of process analytics and solutions. If you will ask me off-forum, I will provide you with his contact information.

He may have a greater insight than I...as a matter of fact, I'm sure of it. But, I'm also sure that there must be changes in David's company.

Randall
WMMA
 
Posted by: leskennedy Accepted Answer
5/16/2005 4:38 PM (CST)
Good afternoon, David.

Your distributor/competition has got the best of both worlds to your detriment. He has your pricing, your product, and a commission from you to sell your solution. He also has his own pricing, his own product, and the ensuing profits (including commission :)) Presumably it is to his advantage to sell his own product/solution if the client doesn't have a preference.

What are the shared advantages, and distinct (unique) advantages that your two lines provide to customers? Have you discussed this potential conflict of interest with this distributor? and what conclusions were drawn? what are the terms of his contract with you?

To increase market share: make it clear how your different channels are distinct, and that they don't compete. Your current distributor may consider it fair play, since you already compete with him by selling direct. Distributors don't like to compete with the manufacturer.

At the same time, find another/ other distributors soon, and dump this distributor/consultant. I suspect that you need to build a program that creates distributor loyalty to your solution, not their own intellectual property - and in a growing market, you can create some powerful new competitors to challenge your current distributor. Your program needs to build mindshare and marketshare of two distinct groups: the distributor and the client. Help your new distributors increase their consulting capability to support the successful implementation and usage of your solution, and to increase your brand presence in the client site through co-branding or power branding. Continue to market your differentiated solution to the end-user, while driving them to your distributors.

All the best.

Les
 
Posted by: David Author Response
5/16/2005 4:43 PM (CST)
Re: WMMA, thanks for your response.
I didn't mean to imply that this situation just recently happened. This distributor/competitor has been around for decades, us only for <10 years. So many of these customer relationships pre-existed our entry into the market. We have an agressive sales force out there, do not currently act as distributor for other manufacturers, have a software value-add that is applicable only to our narrower sub-sector.
 
Posted by: billc24 Member Response
5/16/2005 5:14 PM (CST)
David,
I agree with much of what has already been said. One thought I have is that often vendors who offer value-added services can turn-off budget concious purchasers because they spend a lot of time trying to develop vertical sales. Perhaps a short-term strategy you could investigate is as the "value" supplier, one that doesn't try to force feed you a lot of bells and whistles you don't really need. The difficulty with this strategy is that many companies are looking to farm out services and management of processes, much as your competitor is offering, so you would be giving up those customers.

I hope this helps!
Good luck!
Bill
 
Posted by: Peter (henna gaijin) Accepted Answer
5/16/2005 5:43 PM (CST)
Simply put:
1) expand more in other channels so as to minimize the percentage of your business that goes through this distributor.
2) find a way to differentiate your products from the distributor's, so they can't as easily swap yours for theirs. People still pay extra for Coca Cola over store brand soft drinks because they have differentiated their product through branding.

I know - simple to say, but not so simple to implement.
 
Posted by: W.M.M.A. Member Response
5/16/2005 6:37 PM (CST)
David:
I think Les has hit it right-on target. It's time to have discussion and start shopping for new distributors...stealth.

Then begin to create your differentiation factors. Perhaps the distributor model can be outsourced and you can partner w/the new provider.

Randall
WMMA
 
Posted by: ROIHUNTER Member Response
5/16/2005 6:44 PM (CST)
David,

How about going to this manufacturer/distributor and offer to make them an OEM branded product just for them. Then they can continue their practice and you both benefit.

Just a thought.
 
Posted by: mgoodman Accepted Answer
5/16/2005 9:51 PM (CST)
Some very good comments so far. You are facing a tough situation, and there's probably no quick fix.

Several years ago we had a project with a company (in technology) that found itself in a similar predicament. They were competing with their distributor, and they were losing contact with the end users.

Our recommendation, which they followed, was to focus on products/segments where they could truly add value and differentiate themselves, and cede volume in the products/segments where they were essentially a commodity. It became a portfolio management issue, and it ultimately improved their margins dramatically -- even at volume levels that were slightly lower than they had originally projected (greater than year-ago, but not as "greater" as they had hoped).

It is one of the case studies I use frequently with clients. The investment in R&D, marketing/advertising, and sales support for the proprietary products went up, but the sales/profits went up even more. And the volume losses were all in low margin, highly competitive products/segments, with a net result that was very attractive to stockholders.

I'm not saying this applies to your situation, but it's a lesson worth noting. If the shoe fits ... and all that.

And if I can help with this, let me know.
 
Posted by: sham Accepted Answer
5/17/2005 5:17 AM (CST)
find out since how long the distributor is doing this business and how much it has hit your business, develop a parallel strategy to distinguish your product from his and simultaneously develop other distributors who can do a good business.

come out with a detailed literature or some other promotional material stating the difference between tested and trusted product(yours ) and look alikes (the one manufactured by your distributor to educate the customers
develop parallel network of distributors and give this perticular distributor a natural death
 
Posted by: NoStressXpress Member Response
5/17/2005 8:55 AM (CST)
Several years ago I worked for a very large multi-national giant based in Japan. I was assigned to one of the subsidiary located in North America as their marketing manager and product manager. My company manufactured a product that really interested one of our largest competitors in the process control industry and as a result we eventually manufactured this product with our competitor's brand label on it. Our competitor became our largest distributor (they had over 3000 distributors world-wide) and my company only had 143 in North America and yet, when it was all said and done my company sales were almost equal with our competitors. How did we do it?

1. We treated our competitor as if they were a big customer and a business partner.

2. We avoided any head-to-head competition with them.

3. We concentrated on markets where they were not strong.

4. If they had a strong presence in a market where we wanted to be.....we adopted the philosophy of targeting FIRST TIME users only.

Because we let our competition do all the hard pioneering work for us (which we capitalize on) my company was able to realize a significant savings in the cost per sale category.

Hope this helps.

Conrad
 
Posted by: thinkmor Accepted Answer
5/17/2005 9:33 AM (CST)
Hi David

Some great advice has already been given.

As Mgoodman said there is probably no quick fix. It is clear that that you need re-evaluate your CRM strategy and re-energize your 'direct contact' with your customers. Use this opportunity to collaboratively strengthen your brand by engaging with your customers again and investigate existing and potential customer needs more efficiently.

This will also be an opportunity to re-evaluate your channel strategy and look hard for tailoring opportunities which are highly valued by channels and end customers but involve you in little cost. Also, new approaches to distribution are often easier to develop than superior products and can equally deliver large scale profits. Can you investigate opportunities that are not profitable enough to your distributor?

Your key to increase your influence (and long term success) in any of your channels lies with strengthening your brand, your products and service and you can only do this if you really engage and have a deep understanding of you customers and channels. As Peter mentioned, it is so easer said but it can be done.

Good luck and hope this helps.

Zahid Adil
 
Posted by: Mushfique Manzoor Accepted Answer
5/17/2005 11:07 AM (CST)
hi david

experts have given some great advice, specially Les.

my 2 cents nad some queried are...

1. can acqure his brand and make it yours?? i mean talk to this distributor if he is willing to sell his brand to you. the reason i am saying is that you have not mentioned is pricing a factor of problem, whether he is having a lower price than yours and yet giving better VAS.

2. talk to this distributor whether he is willing to manufacture your brand on a contract basis.

3. differentiate your products/brand from the distributors one.

4. offer better VAS (value added servces) to clients stand out and strengthen your CRM.

5. is the distributor is upset for you selling directly to customers?? what was the logic in the first place to go for both the channels of selling directly and thru' distributors? can you create or develop alternative channels of distribution to counter this distributor. is it possible for you to dvelop the direct selling further.


6. i agree with Les that you should stealthly look for new distributor and gradually replace the current one once you get new one.

7. if you cant beat this distributor for whatever reason then you gotta live with it. then do a portfolio management. i mean, you have mentioned

"The largest distributor ($5B, more diversified) sells
about 40% their own manufactured products / 60% resell. Some of that 40% directly compete with my own line."

so how many products are in this "some of 40%" and what are your margins, are these your bread and butter products. can you tinker with the portfolio that you fight with the distributor as a competitor in segments/products which are not common while cooperate with this common product.

hope this helps. do let us know with your thoughts on this.

cheers!!
 
Posted by: Wiglaf Accepted Answer
5/17/2005 11:18 AM (CST)
Great challenge your in. Accept the principles and work with them through a carrot & stick mechanism.

Your distributor is profit motivated and therefore will only distribute your product if it increases thier sell-through or price greater than selling thier own brand.

This implies that your product must either provide greater value to end customers making them require your product over all others, or that your brand enhances the trust of your end customers so greater than that which would be achieved with a substitute offer.

In both cases, the marketing solution requies that your branding and product improvement be enhanced over that of all other competing brands.

Expenditures on end-customer branding, coupled with market research to detect the core problems end customers are managing that you can provide solutions to, should help. Along this line of attack, the key is to improve your relevancy to the end customer.

Part of a route to suppor this would come from cooperative marketing efforts. This could mean providing market development funds for a direct mail campaign to thier customers, or it could come from offering to defray some of the cost of a trade show exhibit and in turn having one of your account managers staff thier booth. This ensure end customers learn of your brand and value offering and increase your value to your distributor as a "partner" in market development. It would represent a "carrot" for working with them.

The alternative approach is to improve your distribution through other distributors. This may have limited success due to the nature of relationships and the value of the relationships in distribution and value-added reselling. However, if any improvement can be made in this area, it is likely to require fewer resources to make small increments of progress than product improvements and branding. This would be the "stick" to encourage further support from them.

Happy Marketing.
 
Posted by: kwinters* Member Response
5/17/2005 2:33 PM (CST)
Obviously you can't beat them head to head.....

have you thought about creating a situation where you work together for the benefit of both of you?

If you can't beat them, join them....
 
Posted by: David Author Response
5/17/2005 2:53 PM (CST)
Wow, some great responses coming in! Thanks everyone!
Let me clarify a couple of points. Several of the suggestions depend on 'if'...
As I said, high-tech. We focus on high-value-add products, invest heavily in R&D in a very fast-moving field. Having just said that, we offer a mix of unique and commodity items that our sub-segment requires. (Unique today becomes commodity tommorow.)
This distributor/competitor serves a much broader market; we focus sharply on one sub-segment. (Possible advantages here.) Also, they have said publicly that they aim to increase their % self-manufactured overall. (ref negotiating with them)
Though this distributor is largest in segment, they're no MS Windows - even the largest isn't that dominant, the segment is fragmented.
We have a good Web site and take majority of direct sales thru that vs. phone/fax.
 
Posted by: dcandey* Accepted Answer
5/17/2005 2:57 PM (CST)
David,

Not an unusual problem these days where the cost of developing a field sales and marketing strategy is stacked against the "instant" channel penetration offered through established distribution... and where those distribution partners are seeing their margin squeezed by the "brands" they distribute, forcing them to sell white box goods just to keep margins up.

You've received some great advice attacking the problem from a number of angles. Unfortunately, whichever approach you take, there is no quick fix.

I envision three primary scenarios, not necessarily exclusive of each other.

The first will be to increase brand awareness with, and demand from, the end user of your product, thus encouraging the resellers buying from your distributors to demand your product in lieu of the white box goods being offered.

You haven't mentioned whether you have factory sales representation in the field (in-house or independent), whether you advertise aggressively to your customer base, whether you have loyalty programs and/or product promotions in place (user, reseller and distributor), or what other means you've been using to create brand awareness and customer retention. You have also not indicated whether your product has other "branded" competition in your category. These factors will weigh into the feasibility of amping up your existing brand reinforcement to increase the PULL-THROUGH for your product.

The second scenario would be to improve the profitability of your line with your distributor partners by lowering their cost of sales. Aside from reducing the "hard" cost you might consider other options to make the sale of your product on par with their unbranded product. Have you instituted Distributor sales incentives (management and front-line)? No doubt your Distributor provides higher commissions or incentives to their staff for selling their more profitable white box merchandise. Incentives could offset some of their sales commission costs, improving their bottom line. Do you provide regular Distributor staff training, making your product an easier sell? Have you considered providing factory paid support staff at the distributor's location to assist with before and after sales tech support?

Finally, you stressed the problem with this one major distributor. Have you aggressively pursued other distribution partners to find some more harmonious to your brand? As of fiscal year end 2003, total Wholesale revenues for the top 25 Distributors exceeded $65 Billion... there must be other viable channel partners for your product. Nothing spurs loyalty like the potential loss of a valuable brand! The computer market thrives on competition. Unless you have an exclusivity arrangement (hopefully not) with this distributor, make them compete for your favor.

I would examine your total marketing budget, projected for the market share you want to achieve (or protect). After determining your resources, develop a three-phase strategy to increase user/reseller brand awareness, lower distributor cost of sales and increase your distributors' desire to retain representation of your product through increased sales.

You've got a major task ahead... much success.

Dennis
 
Posted by: rob Accepted Answer
5/17/2005 3:59 PM (CST)
I agree with the advice you've been given here and that in the current market, and need to quickly build sales channels. the problem is not unique to your firm at all.

If the majority of your direct sales are coming from your web site. What overall % of sales does that represent? And what % of sales rely on the current distributor agreement? As many have suggested, unless you can make significant changes to the way you position your product, you are at a competitive disadvantage to that of your distributor and in a no-win situation for your company.

I would look to expand your relationships within your sector and work as much of your product as you can through direct sales, as you downsize the amount of product running through this distributor. I also believe it would be wise, as others have suggested, to find a different distributor—possibly in a allied sales channel versus one you have now, faced with a direct competitor as your distributor.

I also agree that strengthening your brand, through a consistent message through your sales team, the possible use of a road show to highlight your solutions directly to clients/persons of interest and actively seeking better ways to manage our CRM and how you meet your customers needs and expectations.

Best of luck. Hope some of this helps, though you certainly have been given some other good answers here already.

 
Posted by: v-man Member Response
5/17/2005 6:47 PM (CST)
David-
How long have you worked for your company?
What position do you hold?
What attracted you to it initially?
What are its five greatest strengths?
Are you local, national or international in scope?

I get the impression that "the market" for your products is established with little growth or change, although that would be counter to technology, in general.

Further, I sense extreme frustration, but not resignation. Not yet.

By asking a couple of questions myself, I have concluded that the Marketing Profs community is highly intelligent, insightful and creative...given enough information.

I suggest you tell these gurus what you sell. To what segment(s) you sell it. What the product does for the user. Anything and everything that's pertinent. Then you will be impressed, if not amazed, by what is given to you.

Best wishes!
 
Posted by: David Author Response
5/17/2005 7:25 PM (CST)
V-Man: I'm sure you're right, but I'm concerned about this open forum. We are both publicly traded. Don't mean to sound like a riddle, but...
Our company's greatest strenght is R&D, yeilding a pipeline of must-have high-margin products. (but product life-cycle is short) Also, execution in operations is very good.
We are international (50-100 countries, Americas, Europe and Asia.) (So is distrib/competitor, but more so.)
Our focus segment is considered hot, expected to continue to grow even more in future, characterized by rapid technological/scientific advancement, first took off in the 1990s. (Dist/competitor, as I said, is more diversified, including in related segments that are mature.)
No resignation in sight; confidence (but, was it Andy Grove who said something about staying paranoid?)
 
Posted by: leskennedy Member Response
5/18/2005 3:51 PM (CST)
David, you state that your company's differentiator is R&D - so you compete on product innovation - is the product lifecycle short, or is the competitive differentiation short lived? (until copied by your distributor/competitors)

Les
 
Posted by: David Author Response
5/18/2005 4:02 PM (CST)
Product lifecycle is short.
 
Posted by: telemoxie Member Response
5/18/2005 11:00 PM (CST)
quick question... when you say they may be 'swapping out your product for theirs..." - do you mean they may be physically removing and replacing the equipment you have sold with comparable equipment, or do you mean they may be replacing 'obsolete' or outdated equipment from your sales team and your other distributors have sold with the new models of their equipment, or do you mean they might be taking advantage of leads you provide to sell their own equipment?

If it were me, I would consider implementing some direct communications to end users, possibly in the form of a customer survey or a lead tracking program, and I would work hard to support my loyal distributors. I would also get a copy of the written agreement with this distributor and read it carefully.
 
Posted by: leskennedy Accepted Answer
5/19/2005 9:16 AM (CST)
David, yours is a tough business, and this is a tough situation. As long as you compete on product innovation, then competitive advantage is not sustainable over the long term without doing exactly what you are doing - that is investing heavily on R& D, and extracting a high return on the first entry in the market. It also means that you are on a fast paced treadmill.

As long as the organization is committed to this competitive strategy, then your best bet is a wide distribution network that can provide ample coverage for wide distribution of your solutions. For you, the service aspect is not as important as training your distribution channel well to sell your solution and the technical advances with convincing compelling business logic.

With this strategy, this distributor is not really a problem in the bigger scheme of things - if he is one of very many distributors. Expand the network. Leave this guy to do his own thing. Expand the network and build their loyalty to your brand and your next new new...

As a market leader in product innovation, you capture the early adopters and innovators, and some of them will try to copy. Accept that risk. And continue to invent - You will continue to be the first in, and build a reputation (as you probably already have) as the innovator for this segment...

If you choose to change the competitive strategy, then you need to think about a changed relationship with your end-users and your distributors - towards the only truly sustainable competitive advantage, backed by product innovation - customer intimacy.
 
Posted by: David Author Response
5/19/2005 10:07 AM (CST)
telemoxie: by 'swapping out' I mean, when they are acting in the role of distibutor taking an order, or earlier in the sales process, or in the context of their value-add spend analysis/inventory management services, influencing the customer to order their self-manufacturered product over ours.
 
Posted by: David Author Response
5/19/2005 1:17 PM (CST)
Well, responses seem to be trailing off. I understand that I'm supposed to close this out now. My first time on this site, so I hope I do this right.

Let me say that the responses have been excellent. I've certainly gotten my $30 worth. THANK YOU EVERYONE!

If I can very breifly summarize the advise that seems to fit best with our situation, (dcandey summarized it well, but I'm putting his 3 in a different sequence. May I also single out Les for praise.):
1. Maximize pull, demand for our brand - based on inovation and customer intimacy. Continue to look for value-adds.
2. Maximize other channels, direct and other distributors
3. Find win-win with this distributor, minimize their incentive to favor their products, etc. (They want their cake and eat it too, offering choice and their own brand.) Ongoing review of our portfolio vis-a-vis margins and competition.

Some that seem to fit less well include OEM'ing for them (fine for us, but they've invested heavily thru acquisition to enter this market so I don't see why they'd want to - maybe for some lines), niching where it's too small for them to bother (gonna stay and fight for the high-margins (they're #1 in the more broadly defined market, but have no MS-like stranglehold; we're very competative in our narrower segment and committed to stay), become low-cost provider (innovation is simply the qualifier to be in this market at all, so we have to go after the high-margins to fund our R&D.)

Again, thank you everyone! and if there are any more thoughts, keep 'em coming. I understand that this Q will remain 'open' for dialog even after it's 'closed' for points.
 


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